Gold on Sale

After rising the prior week, the S&P500 pulled a U-turn and fell 2.1% last week, but this time on rising volume. This means there was more conviction in the week when stock prices fell, than in the prior week when prices rose. To add more weight to the sell-off, the VIX index jumped over 24%, which was one of the largest weekly spikes in volatility in 2013.

US macro data continued to deteriorate. The Empire State Manufacturing Survey plunged. The housing market index fell, instead of rising as expected. And while housing starts were better than expected, the beat came from apartment complexes, not single family homes. The lone good stat of the week was industrial production, which beat expectations. But initial claims, the Philly Fed and leading indicators all missed. In short, there is no true recovery in the US economy, which is not recovering now, nor at any time in the last four years since the Great Recession began. Instead, it’s an economy on life support that barely ekes out any growth at all, and but for the policies of the US government, would be imploding.

Technically, the stock market is still very over-bought and over-bullish. A mere 2% sell-off does very little to change this risky condition. And by risky condition, we mean that the market is priced today to deliver very meager returns over the next 5-10 years. In other words, the equity markets have pulled forward returns that would normally be accruing over the near future to the present day, leaving any new money investors very little true return  going forward. What’s worse, is that a new investor would be vulnerable to experiencing greater volatility and the risk of selling out when prices fall, thereby locking in losses.

Last week, this blog highlighted that gold is going on sale. In fact, by Monday last week, gold had fallen about 20% in almost two weeks, or about 30% from its all-time highs. Truly, if there was ever a clearance sale on gold, this was it. Astute investors all over the world were accumulating physical gold as the decline was led in the derivatives (or paper) markets only. Evidence of this engineered take down was easy to observe—if the price were truly driven by a new equilibrium between supply and demand, then no shortages or excess supply would be observed. In fact, massive shortages developed all over the world, suggesting that the official price of gold was artificially suppressed.

How far did gold fall and how much further could it fall? Well, a few weeks earlier, this blog addressed that question as well. We suggested at an echo of the fall in 2008 could lead to a drop of 35% from peak. Since gold fell several hundred dollars to $1321 last week, it wasn’t all that far away from this mid-$1200 target.

Will it reach $1250? Very possible, now that it came so close, and in fact, it could get taken down even lower.

But if it does, follow the smart money and buy it.

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